News

Mandatory price reporting no silver bullet on its own

James Nason, June 3, 2016

Mandatory cattle and beef price reporting in Australia will benefit producers, but only in a small way.

That is a recurring theme of an in-depth report into mandatory price reporting released by Meat & Livestock Australia last week.

MLA last year commissioned consultancy firm AgInfo Pty Ltd to analyse and report on the benefits, costs and consequences of introducing United States-style mandatory price reporting legislation in Australia.

Many producers who gave evidence to the 2014 Senate inquiry into grassfed industry structures and levies said they believed better price transparency was needed to improve producer returns.

One of the seven recommendations resulting from the inquiry specifically called for industry to conduct an analysis into the pros and cons of introducing legislation in Australia akin to Packers and Stockyards Act 1921 and Livestock Mandatory Price Reporting Act 1999 the United States.

The MLA commissioned report suggests that mandatory price reporting could have benefits in Australia, but on its own the move will be no silver bullet to securing higher farm-gate prices as many may have imagined.

The report says some significant benefits are possible, but only if the move to improve price transparency leads to the introduction of a system that makes it easier for producers to easily and accurately compare different grid prices from different processors, and is accompanied by the introduction of an Australian futures market for cattle and beef and/or an industry-wide move towards value-based marketing (as encouraged by the recently released Meat Industry Strategic Plan 2020 and Beef Industry Strategic Plans 2020).

The report also compares the pros and cons of several different options for Australia’s cattle industry to consider in order to improve price transparency throughout the supply chain (detailed in tables at the bottom of this article).

Key messages included:

Addressing gaps in price transparency and providing improved analysis is likely to result in producer benefits which exceed costs.

This is based largely on experience with mandatory price reporting in the US where studies generally show small, but tangible, producer benefits from such legislation.

Net benefits for Australian producers are however likely to be small.

The report notes that there is already a lot of market information available in Australia. The NLRS reports on 45 auction markets per week as well as over the hooks offer prices.

“Further market information is unlikely to change the market conditions, particularly those in 2013-14, when drought-induced supplies depressed prices.” the report states.

The report does, however, make the point that the level of market information available to Australian producers is less than their US counterparts, and suggests that increasing available information may be of greater marginal value in Australia.

It also identifies some ways in which the amount of market information available to Australian producers has deteriorated:

  • Wholesale beef prices are no longer collected in Australia due to an apparent unreliability/thinness of market at point of collection;
  • MLA now only collects export beef prices to Japan on a monthly basis, instead of weekly;
  • No export beef prices are collected for expanding markets such as China and Indonesia;
  • The last time processor shares of beef production was surveyed was 2007. Without this information producers and government have very little data on which to assess questions of processor market power, including the impact of takeovers/mergers.

Benefits for Australian producers are only likely to be substantially if improved price and market information leads to either:

  • The introduction of an Australian futures market for cattle or beef, or
  • A move towards value-based selling/marketing

The objective for the industry in any implementation of greater price transparency must be to ultimately achieve at least one of the above two outcomes – otherwise net benefits will be marginal.”

In assessing the US experience, the report says 95pc of price discovery in US cattle markets emanates from the futures market.

The introduction of mandatory price reporting in the US in 1999 did not result in US processors significantly altering the methods used to set cattle prices.

Also, mandatory price reporting in the US had no affect on processors exerting market power. In fact, the report says, there is evidence to suggest that in some circumstances mandatory price reporting may have even aided processors in exerting market power.

However, the majority of studies in the US, including the latest evidence, indicates that mandatory price reporting has been beneficial to US producers, and has played a very small but detectable role in price discovery.

The report said significant differences between the US and Australian cattle industries industry meant that findings from the US experience with mandatory price reporting cannot simply be transferred to Australia.

Australia’s beef production system is much more diverse than that of the US and has much more complicated payment systems.

For example, in the US, when cattle are sold on a grid basis, payment is typically made on three factors:

  • the dressed weight of the animal;
  • the USDA grade achieved; and
  • The yield grade achieved.

Furthermore, in the US the USDA grade and the yield grade is determined independently (by a USDA inspector), not by the processor (i.e. the buyer).

However, Australian producers justifiably complain that grids are too complex and impossible to compare, even on core and consistent turnoff. There are instances where grids in Australia contained 104 possible values for the Ox category alone.

Also, Australian producers complain that excessive and unfair discounts apply against the grid, especially in times of abundant supply.

The report concludes that greater collection of cattle and beef prices by itself will not solve the price transparency issue.

The greatest benefit from mandatory price reporting in the US has been to apparently encourage a move to vertical supply chain integration with many more cattle being transacted under value related payment systems.

In the US the share of cattle transacted on a negotiated cash basis (ie through auction market or via direct sales with price simply determined by live weight) has declined from over 60pc to less than 30pc now. At the same time the proportion of cattle transacted under the Alternative Marketing Arrangements (eg using dressed weight/USDA grade/yield grade as the basis for payment) more than tripled.

Greater price transparency may prompt such a move towards value based payment systems here in Australia, but only if accompanied by:

  • Methods to make it easier for producers to compare alternative grids;
  • Measures to instil producer confidence that cattle have been fairly assessed against grids. This may include simply providing producers with greater information on systems already in place or it may involve additional auditing of assessment procedures;
  • Educating producers to understand the feedback they receive.

 

What industry needs to do now:

The next steps industry now need to consider, according to the report, includes:

  • To decide whether there is enough evidence to say there would be a net benefit for cattle producers in increasing price transparency along the cattle/beef supply chain;
  • To decide if Government intervention is needed to secure increased price transparency through implementing mandatory price reporting (or at least to decide if industry should implement measures to improve price transparency);
  • Decide whether the cooperation of the processing sector should be sought in implementing initiatives to improve price transparency;
  • Decide on whether services should be provided to facilitate ready-comparison of grids by producers and methods/education introduced to give greater confidence that cattle are being properly assessed against grids.

The report also provided a comparison of several different options available to Australia to increase cattle and beef price transparency, which are detailed in the tables below (click on each table to view in larger format. If unable to read tables below, full report containing the same tables can be viewed at this link):

MLA table 1

MLA table 2 MLA table 3 MLA table 4 MLA table 5 MLA table 6 MLA table 7

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